The Complete Guide to Business Expense Deductions

The 'ordinary and necessary' test

IRC §162 allows deductions for expenses that are ordinary (common in your trade) and necessary (helpful and appropriate). Neither word means 'required'. A coding bootcamp is ordinary and necessary for a software consultant; a barista's apron isn't.

Fully deductible categories

• Office rent, utilities, internet
• Software, SaaS subscriptions, professional tools
• Contractor and employee wages
• Business insurance and professional liability
• Marketing, advertising, web hosting
• Education that maintains or improves current skills
• Bank, payment processor, and accounting fees

Partial or limited deductions

• Meals — 50% deductible if business purpose; document who, where, why
• Vehicle — standard mileage (67¢/mi in 2024) or actual expenses × business %
• Home office — see our deep dive
• Gifts — capped at $25 per recipient per year

Never deductible

• Personal living expenses
• Commuting between home and a regular workplace
• Most entertainment (post-TCJA)
• Fines, penalties, and political contributions
• Clothing suitable for everyday wear

Section 179 and bonus depreciation

Equipment, computers, vehicles over 6,000 lbs GVWR can often be fully expensed in year one instead of depreciated. 2024 bonus depreciation is 60% (phasing down). Section 179 limit is $1,160,000 for 2024.

The records you must keep

• Receipt or invoice (digital scans are fine)
• Date, amount, vendor, business purpose
• For meals/travel/vehicle: who, where, why, how far
• Separate business bank and credit card accounts — non-negotiable

Keep records for at least 3 years (7 if you claim a loss).

The hobby-vs-business line

If your activity loses money 3+ years out of 5, the IRS may reclassify it as a hobby — killing all deductions. Document profit motive: business plan, separate accounts, marketing, time invested.